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UPM Books $2 Billion Charge as Europe Woes Hit Paper Demand

UPM-Kymmene Oyj, Europe’s second-largest paper maker, booked writedowns and other charges that clipped fourth-quarter profit by 1.6 billion euros ($2 billion) after Europe’s debt crisis dented demand for paper.

UPM will record an impairment charge of 1.8 billion euros at its paper unit, including 783 million euros related to goodwill and a 987 million-euro writedown on fixed assets, Helsinki-based UPM-Kymmene said in a statement today. The stock gained as much 5.8 percent as the company will cut jobs and close some facilities to lower costs and operating profit was better than estimated by some analysts.

European paper producers have suffered from declining demand since at least 2005 as consumers shift to online media. Europe’s sovereign debt crisis, unemployment and austerity measures seen in much of Europe is exacerbating the challenges faced by the industry. UPM said it has not been able to improve the profitability of its European graphic paper business as much as targeted and it doesn’t see any significant improvement in profitability in the foreseeable future.

The results pose “longer-term questions over the profitability of the paper segment and the group’s overall strategy in the space in the absence of more dramatic action to improve returns,” said Bank of America analyst Kartik Swaminathan. “On the other hand, the better than expected results and cut to pension liabilities may well drive a positive share price action.”

Job Cuts

The stock gained as much as 50.5 cents to 9.29 euros in Helsinki trading and was up 5.2 percent as of 9:14 a.m., valuing the company at 4.9 billion euros. The company’s shares had gained 6.2 percent in 2012, while Finland’s benchmark Helsinki 25 Index increased 16 percent.

The company, which plans to reduce graphic paper capacity in Europe by 580,000 tons, said it will close and sell some facilities in Finland, Germany and France and cut 860 jobs.

Operating profit before some items dropped 6.1 percent to 138 million euros in the fourth quarter. UPM-Kymmene had initially forecast fourth-quarter operating profit before special items at the same or at a lower level than in the third quarter, when it stood at 122 million euros.

The company reported an operating loss before special items of 10 million euros at its paper business in the latest three months. UPM is scheduled to report final 2012 earnings on Jan. 31.

Energy Boost

The paper- and pulpmaker also said that the introduction of new accounting rules in the first quarter will increase asset values at its energy business area by about 1.95 billion euros. UPM’s interest-bearing liabilities will increase by some 200 million euros because of the new accounting standards, while its equity will be reduced by some 315 million euros in the first quarter because of new pension liability accounting rules, it said.

UPM is expanding in energy generation and electricity trading to counter a glut in paper production and the rise of the Internet. Paper operations have been operating at about break even for the past two years and the merger of plants had failed to achieve the targeted cost savings by the end of last year, according to the company.

“UPM’s asset values will now better represent the fair values of the businesses,” said Chief Financial Officer Tapio Korpeinen. “I believe this will contribute to investors’ confidence on our balance sheet values.”

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